Metered Access

Crain's Detroit Business is a metered site. Print and digital subscribers have unlimited access to stories, but registered users are limited to eight stories every 30 days. After viewing three metered stories, you'll be asked to register or log in. After eight more stories in 30 days, you'll be asked to subscribe.

Tim Hortons failing to catch on with U.S. coffee, doughnut crowd, investors say

Tim Hortons' failure to catch on with consumers in the U.S., where the coffee and doughnut chain's Canadian charm means little in a crowded fast-food market, is causing growing unrest among its shareholders.

Activist investors say the $664 million U.S. expansion over the last decade has been a waste. At stake may be a forced retreat from a market that promises the Oakville, Ontario-based company potential growth as it reaches saturation at home.

"They are meeting the point at which they won't be able to open any more stores in Canada," said Jim Danahy, chief executive officer of Customer LAB, a Toronto-based retail consulting firm, in an interview. "They know long-term growth will have to come from the US."

Tim Hortons recently faced criticism of its U.S. strategy from activist investors Highfields Capital Management LP of Boston and New York-based Scout Capital Management LLC, which hold 4 and 5 percent of the company's shares, respectively. Both investment firms pressured the company to scale back U.S. expansion, and instead direct capital to share buybacks.

The chain's U.S. locations are branded as Tim Hortons Cafe & Bake Shops in an attempt to emphasize fresh offerings and explain the concept to unfamiliar consumers, says Danahy.

For customers like Chuck Kroneck of Macomb Township, the name change isn't enough.

"In places where people really know hockey, they say 'hey let's go to Tim Hortons,'" he said after wandering into a nearly empty New York location. "Otherwise, they're going somewhere else."

Wake-up call

With a U.S. market share of only 2.7 percent, according to retail consulting firm Technomic Inc., Tim Hortons hasn't been able to replicate the institutional status that it enjoys in Canada, where it claims to sell eight of every 10 cups of coffee sold.

The chain was founded in Hamilton in 1964 by late National Hockey League player Tim Horton, the man credited with inventing the slap shot. The chain plays off its founder's hockey roots, sponsoring minor hockey development programs, and can be found in practically every city in the country. The company has 3,453 locations in Canada, more than McDonald's Corp.

There are more than 130 Tim Hortons in the metro Detroit area.

"The company's consistent and long-standing underperformance should long ago have been a wakeup to Tim Hortons' board and management," Scout Capital said in a letter on June 25. "We urge you to curtail the use of the company's cash flow to fund real estate or new store capex in the U.S."

Scout Capital declined to offer further comment, said Josh Pekarsky, a spokesman for the company, in an email on July 16. Highfields Capital didn't respond to a voicemail asking for comment yesterday.

Growth and shares

Even with the slow growth in the U.S., investors have pushed the shares higher. Tim Hortons has risen 21 percent this year, compared with a 1 percent gain in the Standard & Poor's/TSX Composite Index, Canada's benchmark equity gauge. Seattle-based Starbucks has gained 27 percent, while McDonald's of Oak Brook, Illinois has risen 13 percent. Tim Hortons' market value is C$9.02 billion, making it the fourth-largest publicly traded fast-food company in the world, after McDonald's, Starbucks, and Yum! Brands Inc.

The company's revenue growth has slowed from a double-digit pace a decade ago. Sales are expected to rise about 4 percent this year, down from 9 percent last year and 12 percent in 2011, according to Bloomberg data. Adjusted earnings per share growth is also projected to drop for a third straight year.

Tim Hortons entered the U.S. in 1984 with a store in Tonawanda, New York. The company has since expanded to 10 more states, opening 804 stores in areas including Indiana, Maryland, Kentucky, Michigan and Pennsylvania. It also expanded into the Middle East, the U.K. and Ireland, according to the company's website.

Tim Hortons' spokeswoman Hailey Dedominicis didn't respond to an voicemail asking for further comment on its U.S. expansion.

While it dominates in Canada, the company derives only 5.3 percent of its revenue from its U.S. locations, which account for 18 percent of its total stores, according to data compiled by Bloomberg. Canadian stores generated C$182,000 ($175,000) in operating profit per store last year, whereas U.S. stores generated C$20,000 per store, said Derek Dley, an analyst at Canaccord Genuity Corp., in a phone interview July 16.

Analysts have attributed the comparatively poor results in the U.S. to the company's inability to adapt its marketing to U.S. consumers, along with the chain's small market presence.

More options

"Competitiveness and brand would be the two biggest issues for them in the U.S.," said Bobby Hagedorn, a St.Louis-based analyst at Edward Jones, in an interview. "There's just more options, and they're just so much smaller."

Hagedorn said the Canadian chain's brand doesn't hold any weight when compared with peers like Dunkin Donuts and Starbucks Corp.

"I don't think they've advertised as much as they could, that has a lot to do with it," said Darren Tristano, executive vice president at Technomic, a Chicago-based food industry research and consulting firm. In the U.S., consumers are loyal to local chains they've been going to for decades and more advertising is needed, Tristano said in a phone interview. "When you're Tim Hortons in Canada, you're used to winning battles."